Unilever Plc (UL) is set to report second quarter 2014 results on Jul 24. Last quarter, the company delivered revenues of Euro 11.4 billion (*$15.6 billion), which declined 6.3% year over year (in local currency) and also lagged the Zacks Consensus Estimate of $16.1 billion. Let's see how things are shaping up for this announcement.
Factors to Consider this Quarter
Unilever’s sales growth has lost its pace since the fourth quarter of 2013, mainly due to its operations in emerging markets, which account for two-third of its revenues. Though the company’s organic sales increased 6.6% (in local currency) in the emerging markets in the first quarter, it was much lower than 8.4% growth in the preceding quarter. The continued economic uncertainty and a stronger Euro have been hurting sales since last two quarters. Developed markets have also been weak since fourth quarter 2013, especially North America. The weakness is expected to persist in the second quarter as well.
Moreover, the company anticipates the volatility in the external environment to persist and expects low- to mid-single-digit commodity cost inflation throughout 2014, largely due to currency headwinds.
Unilever has also been witnessing a slowdown in its spreads business, which is hurting profits at its Foods segment. The company is working to improve its ailing spreads business, which has suffered for years due in part to a consumer perception that margarine is less natural than butter. Though Unilever has launched new margarine products in Germany, the United States and Britain that highlight naturalness and healthiness, the decline of the margarine market continues to remain a drag on spreads growth. We believe the business will take time to return to profitability as it is still generating negative returns.
However, we are quite optimistic on Unilever’s cost savings programs, which may drive solid operating margin growth in 2014. The company has also recently completed its planned divestiture for North America and will now focus on its core portfolio to deliver sustainable growth. These positives will surely drive results in the second quarter.
Earnings Whispers?
Our proven model does not conclusively show that Unilever is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank of #1, 2 or 3 for this to happen. That is not the case here as you will see below.
Zacks ESP:ESP for Unilever is 0.00%.
Zacks Rank #3 (Hold):Unilever’s Zacks Rank #3 when combined with an ESP of 0.00% makes surprise prediction difficult.
We caution against stocks with Zacks Ranks #4 and #5 (Sell rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.
Other Stocks to Consider
Other stocks in the consumer staples sector that have both a positive earnings ESP and a favorable Zacks Rank are:
TreeHouse Foods, Inc. (THS), with Earnings ESP of +1.21% and a Zacks Rank #1 (Strong Buy).
Dr Pepper Snapple Group, Inc. (DPS), with Earnings ESP of +3.30% and a Zacks Rank #3.
Energizer Holdings, Inc. (ENR), with Earnings ESP of +1.29% and a Zacks Rank #3.
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